IRS Provides Guidance on Retirement Plan Provisions of CARES Act

May 12, 2020

On May 4, 2020, the IRS released a set of questions and answers discussing the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). As background, the CARES Act was enacted on March 27, 2020, and included a number of provisions affecting retirement plan and IRA rules. We discussed those provisions in an article in the March 31, 2020, edition of Compliance Corner.

The questions and answers simply confirm the availability of expanded hardship distribution and loan options available to individuals that are effected by the COVID-19 crisis. Notably, the IRS indicates that they anticipate releasing guidance on the CARES Act retirement provisions. But until that guidance is issued, they acknowledge that it will be similar to the guidance that was applied to victims of Hurricane Katrina (via IRS Notice 2005-92).

The questions and answers go on to address the tax treatment of COVID-19-related hardship distributions, confirming that individuals will be able to pay the taxes on any such distribution ratably over a three-year period. Individuals can also choose to repay their COVID-19-related distribution within three years of receiving the distribution. If this is done, the distribution will be treated as if it were a trustee-to-trustee transfer and the individual will not owe federal income tax on the distribution. Depending on when the distribution is repaid, this could require the individual to amend previous tax returns (if for example the individual repays the distribution in 2022, but previously paid taxes for the 2020 and 2021 year). Further, the guidance points out that retirement plans are encouraged but not required to accept repayment of distributions.

The IRS also reiterates the provisions affecting plan loans. Specifically, certain loan repayments can be delayed for up to one year. Additionally, the CARES Act increased the maximum loan amount.

The questions and answers also address a number of administration and reporting issues. Namely, plan sponsors are not required to adopt the hardship distribution and loan rules found in the CARES Act. If they do, plan administrators may rely on an individual’s certification that they are eligible to receive the COVID-19-related distribution or loan. Individuals that take a COVID-19-related distribution will report this on their federal income tax return, and plan administrators will also provide Forms 1099-R (as they do with any other hardship distribution).

Employers that will amend their plans to allow for these COVID-19-related changes will want to familiarize themselves with this guidance. We will continue to monitor this issue and share additional guidance as the IRS provides it.

Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers »